Current ACH Risk-Management Proposal To Be Followed by Two More

Proposals to print originators' names on statements and to make compliance audits hinge on the kind of transactions banks are originating are set to follow a current proposal from NACHA-The Electronic Payments Association to increase penalties for unauthorized transactions on the automated clearing house network, according to a NACHA official. The proposals represent parts of a comprehensive approach to risk management NACHA has undertaken to clean up ACH entries and cut down on fraud. The current proposal, which has been out for comment among NACHA's members and ACH network users since February, would impose new reporting requirements on originating depository financial institutions (ODFIs) found to be sending an excessive volume of unauthorized transactions through the network, with the threshold to be set by NACHA's board of directors and subject to periodic review. It raises current monetary fines for network violations and includes the power to cut off access to the ACH for companies or processors in extreme cases. Under NACHA rules, originating banks must issue a legally binding warranty that all payments are authorized. Fines could run as high as $500,000 per month in cases where a financial institution has been found to be in “willfully disregard” of the rules for three straight months. Failure to meet the reporting requirements or to reduce unauthorized transactions below the threshold within a specified time would constitute willful disregard. The proposal would also hand NACHA the ability to start enforcement proceedings. Comments are due by April 23. Most comments on rules proposals tend to arrive within a few days before the deadline, the association says. If the comments are generally positive, the proposal would be voted on this summer by NACHA's members, with a 67% approval required for enactment. The current proposed effective date is September 21. The proposal does not refer to a network return-entry fee (NREF), a measure NACHA tried to establish two years ago as a way to reduce network fraud. The NREF, which would have required originating institutions to reimburse receiving depository financial institutions for the costs of handling unauthorized transactions, stirred considerable controversy and was ultimately voted down by NACHA's membership (Digital Transactions News, June 10, 2005). Nor does it seem likely the two coming proposals will revive the fee. “Right now we don't know if that will be coming back again,” says Jane Larimer, senior vice president for ACH network services at NACHA, which sets rules for the ACH. Without giving numbers, a spokesman at Herndon, Va.-based NACHA says the percentage of ACH transactions returned as unauthorized has declined steadily in recent years. But because overall ACH volume is growing at double-digit rates?up 15.6% in the fourth quarter of 2006?the number of returns in absolute terms is also rising, albeit at a slower rate. He and Larimer say the problem stems from a handful of originating institutions and their clients. “We're trying to go after the outliers,” says the spokesman. Approximately 16 ODFIs accounted for 500 or more returns per month, figured on a six-month average, as of February, according to a NACHA presentation on the proposal now out for comment. Nine of the 16 are not ranked among the network's 25 largest ODFIs. The current proposal will be followed within the next month or two by one that would require that the name of the company originating the transaction be more clearly spelled out on customer bank statements, Larimer says. It would also require that a customer-service phone number for the originator be kept on file, though it would not have to appear on the statement. Larimer says NACHA is also pondering a proposal to have audits of ODFIs for rules compliance reflect the complexity of the transactions they are sending into the ACH.